Smart Globalization: The Key To Global Success

by Tarun Kota

“The world needs smart globalization, not maximum globalization.”

- Dani Rodrik, Economist & Professor at Harvard University


For centuries, trade has been an integral part of society. Modern-day civilization is no exception to this. Oftentimes, having completely open borders is seen as the golden ticket to economic stardom. However, this mentality sometimes steers leaders towards forgetting about the losers of rapid globalization, which can lead to harmful effects for countries and their citizens.



That’s why the United States should pursue a two-pronged trade policy that aims to protect domestic and foreign losers of free trade, all while keeping its place as an economic powerhouse. First, the United States should use domestic economic development incentives as a protection tool. Secondly, the United States should establish an international regulatory framework that aims to protect emerging economies that are being hurt by globalization.


To find the optimal trade policy, the parties vulnerable to the negative effects of free trade must be identified. The first losers of free trade are individuals of low socioeconomic status.



As described in a speech by William Dudley, President of the Federal Reserve of New York, these individuals are often the most vulnerable to trade shocks, because they have few or no safety nets and less financial resources to adapt to economic shocks. Another party of losers consists of US industries that are directly in competition with foreign industries. This is because foreign firms can undercut US firms with unsustainably low prices, which leads to job layoffs and firm shutdowns.


For example, empirical evidence finds that increased Chinese import penetration in US markets was a major cause of the 10% US job decline in the manufacturing industry in 1999-2011. Developing countries with emerging economies also lose it. This is because developed countries, when trading with developing countries, often use their economic might to gain concessions that benefit their country at the cost of stunting the economic growth of the developing country.

To tackle the above issues, the United States should employ a protection system that uses domestic economic development incentives to compensate US workers and regions negatively affected by foreign trade. The first Domestic economic incentive the United States should employ is wage subsidies. Wage subsidies help domestic workers compete with foreign workers by subsidizing employers for the extra cost of local labor.


For example, if a manufacturing worker in the United States demands a wage of 15$ per hour while a manufacturing worker in a less developed

country demands a wage of 12$ per hour, the US government would subsidize the extra three dollars of domestic labor. Moreover, it would protect US workers from international workers in countries where there is little regulation on working conditions and wages.


However, unlike most subsidies, wage subsidies wouldn’t be a drag on the economy. Since government support is contingent on work, wage subsidies would encourage productivity from businesses and its employees, therefore stimulating the US economy.


The second economic development incentive that the United States should pursue is opportunity zones. Opportunity zones are economically distressed communities determined by the US government that have tax incentives that encourage investors to invest in these undercapitalized communities. Extra investment in these communities provides stimulus to local businesses and entrepreneurs, therefore, helping the economy rebound.


Furthermore, the economic stimulus would also alleviate high poverty levels in these communities. Opportunity zones would overall be a very effective compensation tool for regions distressed by trade. They would assist current trade adjustment programs by providing new jobs and opportunities for workers displaced by foreign trade. Ideally, the United States should tie its use of opportunity zones directly to how a region is being affected by international trade.


For example, if a region loses 5% of its GDP due to international trade, it would then be identified as an opportunity zone. In reality, using a protection system that is run by economic development incentives allows the United States to protect its vulnerable workers and regions without risking its place as a global economic leader.


Lastly, the United States should push to establish an international regulatory framework on trade that aims to turn all participants into winners. Currently, global trade regulations are complex and challenging to navigate. Unfortunately, a complex regulation system hurts developing countries the worst.


For example, African exporters of textiles and clothing lose up to 50% of their potential export earnings because European Union regulations differ from the international standards set by the International Organization for Standardization.


Thus, the United States, through its economic influence on global platforms, should push for international convergence into one clear base regulation framework. This global regulation framework should lay out clear rules for human rights, labor norms, trade agreements between countries, and other trade regulations. Having a base framework on trade would be beneficial for emerging economies around the world.



Since this hypothetical world is driven by pre-committed policy rather than

reactions to trade outcomes, it would help reduce economic power asymmetries between countries. Furthermore, since this global framework would push for more fair working conditions and wages in third world countries, it would help level the playing field for companies and countries around the world. In reality, having a cleat trade framework gives emerging

economies a safe and easier path to economic sustainability and success, as well as benefiting developed economies.


Trade can be extremely valuable for a country and its economy. However, it would be foolish not to look at many risks posed by globalization. That said, protectionism shouldn’t be taken to extremes either. Instead, the United States should strike a balance between protectionism and globalization that aims to turn all participants into winners.




References


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2020, from

https://www.wto.org/english/thewto_e/dg_e/dft_panel_e/future_of_trade_report_e.pdf

2. Benefits and Challenges from Globalization. (n.d.). Retrieved from

https://www.newyorkfed.org/newsevents/speeches/2017/dud170511

3. Acemoglu, Daron, et al. “Democracy Does Cause Growth.” 2014, DOI:10.3386/w20004.

4. Weisbrot, M. (2014, February). Did NAFTA Help Mexico? An Assessment After 20 Years.

Retrieved from https://cepr.net/documents/nafta-20-years-2014-02.pdf

5. Huttunen, K., Pirttilä, J., & Uusitalo, R. (2013). The employment effects of low-wage subsidies. Journal of Public Economics. Retrieved from

https://www.sciencedirect.com/science/article/abs/pii/S0047272712001065#!

6. Cass, O. (2018, November 16). The Case for the Wage Subsidy. Retrieved from

https://www.nationalreview.com/2018/11/case-for-wage-subsidy-government-spending-book-

excerpt/

7. Opportunity Zones. (n.d.). Retrieved from https://www.eda.gov/opportunity-zones/

8. Simon, M. (2019, April 1). What You Need to Know About Opportunity Zones. Retrieved from

https://www.forbes.com/sites/morgansimon/2019/03/30/what-you-need-to-know-about-

opportunity-zones/#69ad85db6ae2

9. BUILDING JOBS AND PROSPERITY IN DEVELOPING COUNTRIES. (n.d.). Retrieved

from https://www.oecd.org/derec/unitedkingdom/40700982.pdf

10. The Global Trading System: What Went Wrong and How to Fix It. (n.d.). Retrieved from

https://www.cfr.org/article/global-trading-system-what-went-wrong-and-how-fix-it

11. Reiter, J. (2016, September 29). 5 ways to make global trade work for developing countries.

Retrieved from https://www.weforum.org/agenda/2016/09/global-trade-developing-countries-unctad/


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